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HMRC internal manual

International Manual

HM Revenue & Customs
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Controlled Foreign Companies: exemptions - the motive test: Application of motive test: loan relationships legislation

In certain circumstances a United Kingdom interest holder in a controlled foreign company can be treated as having a creditor relationship with that same company under the loan relationships legislation introduced in FA96 which results in a tax charge on the UK company. Where this is so and the increase in value for the loan relationships legislation reflects the chargeable profits arising for an accounting period, then the motive test will be accepted as applying for that period. This is because, whilst there is a reduction in UK tax within the meaning of ICTA88/SCH25/PARA19, that reduction is fully compensated for by the tax charge on the UK parent indicating that the achievement of that reduction is not one of the main reasons for the controlled foreign company’s existence. See INTM255470 (Example 9).